The general public has been able to invest in cryptocurrencies for around a decade now. It has become much easier over that time as new exchanges have come online, providing features that are aimed at less-experienced users and aiding the conversion between fiat currencies and digital tokens.
As with any asset class, financial companies began creating derivatives for advanced and experienced investors to trade. This included relatively simple instruments like futures contracts as well as more complicated ones like “contracts for difference” (CDFs).
More recently, there has been a lot of focus on crypto exchange-traded funds (ETFs), especially after Goldman Sachs became one of the many companies to apply for one. In October, the United States Securities and Exchange Commission approved the ProShares Bitcoin Strategy ETF, which began trading shortly afterward with the ticket “BITO”.
But given that it’s already pretty easy to start investing in cryptocurrencies like Bitcoin, what is the point of an ETF, and should you invest in one?
What is an ETF?
An ETF is a financial product that you can invest in. It is traded on a stock exchange (hence the “Exchange-Traded” part of the name) and has traditionally been used for funds that hold multiple stocks or other assets (hence the “Fund” part of the name).
They provide instant diversification for passive investors who want to invest in an entire index of companies and make it easy for them to gain exposure to commodities like oil and gold.
Some of the most famous ETFs are ones that track major indices like the SPDR S&P 500 ETF and the iShares Core FTSE 100 UCITS ETF.
What is a Bitcoin ETF?
The first crypto ETF was the ProShares Bitcoin Strategy ETF which lets investors gain exposure to the bitcoin futures market rather than the spot price. This means it doesn’t hold any actual bitcoin, but instead buys derivatives that are linked to the future price of the cryptocurrency.
Other ETFs may work differently when they launch, though for regulatory reasons, it is likely they will all use derivatives of some form instead of directly holding a cryptocurrency.
Should You Invest in a Cryptocurrency ETF?
There is no definitive answer to this question. Everyone has different needs and investment priorities, so everyone needs to do their own research.
This is exactly the same as before you do anything else. If you consider buying a new house, you need to research the area to see if it has the right features and amenities for you. Similarly, if you’re someone who likes to play casino games, it’s always a good idea to check factors like RTP, promo terms, and features before deciding to play a particular slot.
There are some key factors about the Bitcoin ETF that will make it attractive to some investors and less appealing to others.
For those that don’t already have an account with an exchange, especially those that can’t create one, a Bitcoin ETF may be the first time they’ve been able to gain exposure to the crypto market.
However, for most retail investors, companies like Coinbase and Robinhood have made it about as simple as it could ever be to exchange fiat currencies for crypto and hold it. Typically, these will have lower fees than a cryptocurrency ETF, even if you’re investing through a commission-free broker. This is because the management costs of running an ETF will be a drag on its performance, however small those costs may be.
That said, anyone that wants to add cryptocurrency exposure to a pension or other similar tax-efficient financial product will likely need to use an ETF since there are few places currently allowing such accounts to hold digital currencies directly.
Overall, there is no clear definitive answer as to whether a Bitcoin ETF is worth investing in. For supporters of the entire crypto movement, the launch of the first ETF is more symbolic than anything else. However, for some investors, this will now be the first time they’ve been able to hold an instrument that is linked to the price movements of a cryptocurrency.
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